‘Tax free’ not whole answer for Maine’s depressed counties

George Gervais, commissioner of the Department of Economic and Community Development

Posted Sept. 19, 2013, at 4:04 p.m.

Would eliminating the state income and sales taxes in Maine’s poorer “rim counties” attract businesses to those depressed areas, spark job growth and reduce government dependency?

That’s what the Maine Heritage Policy Center is betting would happen through its Free ME initiative, which the center introduced last month in a report that proposes a county-by-county elimination of state taxes in Maine’s economically depressed counties. It would start in Washington County, then perhaps expand to Aroostook, Franklin, Oxford, Penobscot, Piscataquis and Somerset counties.

Maine has a long history of undertaking economic development policies that try to create growth in depressed areas and shrinking industries. Despite those efforts, virtually all of Maine’s economic and population growth in recent decades has taken place in the state’s metropolitan areas and service-oriented — rather than goods-producing — industries.

Free ME uses one of those economic development efforts, the Pine Tree Development Zones, as its foundation. Started under Democratic Gov. John Baldacci, the program initially offered major state tax breaks and lower energy rates to businesses in broadly defined economic sectors that located in depressed areas.

In 2009, lawmakers made the entire state a Pine Tree Development Zone. The expansion, however, limited the length of tax benefits for businesses located in those areas perceived as doing well: Businesses in select towns and cities in Cumberland and York counties today can receive five years in benefits, while businesses elsewhere in Maine can qualify for 10-year tax breaks.

The Free ME report wisely points out the Pine Tree Development Zones’ shortcomings. In the program’s decade-long history, we’ve never been able to assess how effective it’s been at creating jobs and adding economic activity to Maine. More than 300 businesses participate, but we don’t know for sure if those businesses have created jobs because of the Pine Tree Development Zones, or if they simply gained tax benefits for undertaking expansions and making hires they would have made anyway.

The Maine Heritage Policy Center uses the Pine Tree Development Zones’ weaknesses to strengthen its argument that government needs to get out of the way entirely, rather than implement highly structured incentive programs, to promote economic development. For the Heritage Policy Center, eliminating sales and income taxes altogether is the logical next step.

But just as we’re not ready to celebrate Pine Tree Zones, we want to see proof that eliminating taxes in a single region of the state would actually spur growth and not simply inspire businesses to relocate within state lines. We also want to see a state strategy for making crucial investments in workforce development, so businesses have a compelling reason beyond taxes to locate in Maine and its depressed counties: top-quality workers.

We fear that eliminating state taxes in seven of Maine’s 16 counties could inhibit the state’s ability to make those crucial workforce development investments. And we’re concerned further reductions to the progressive income tax would force hikes in local property taxes, which disproportionately burden low-income taxpayers.

The Maine Heritage Policy Center cites enterprise zones, a concept that’s been around for decades, as a model for what it’s attempting through Free ME. But research examining enterprise zones doesn’t offer compelling evidence that the zones create new economic activity more than they inspire businesses to relocate.

The fact that the initiative is being considered as a compelling economic development option for Maine speaks to a larger shortcoming for the state: There’s no agreed-upon vision for Maine’s economic future. Policymakers aren’t willing to develop a growth plan and stick to it. As a state, Maine doesn’t know what sectors it wants to focus on developing that make sense given location and offer the state an economic niche and competitive advantage.

If Maine started with that much, policymakers could orient tax policy accordingly and make deliberate government investments rather than invest blind faith in an unproven initiative.